Record labels growing unease with ad supported music streaming services

A couple of weeks ago I wrote about Edgar Bronfman, CEO of Warner Music Group, making negative public statements about free music streaming services. Now it seems the head of steam against Spotify, We7, et al is really building amongst industry execs, and possibly artists too.

The new news is came yesterday from market research outfit NPD Group. They have found that free on demand music streaming sites lead to a 13% decrease in paid downloads. In other words, not only do streaming services not generate much money directly for artists, they also reduce the amount musicians are getting from other channels. The labels also note that there have been lots of music streaming failures and no real successes – SpiralFrog and Ruckus closed their doors last year and Imeem sold out on the cheap to Myspace. Pandora has achieved profitability (if only for a single quarter) and is the closest thing to a success story, but crucially, they are a radio service, not an on-demand service.

All of this is pretty potent criticism, but it is worth remembering that the labels are making money from the free streaming services via their minimum guarantees, so there is at least some cash sloshing around. As we all know, the internet loves disintermediation, and as industry observers we shouldn’t assume that any of the existing players have a right be part of the value chain forever.

In a related development, US based on demand subscription service Mog.com has raised money from European venture fund Balderton Capital to launch their subscription service over here. Interestingly Mog are pitching themselves as a cheaper on-demand subscription service than Spotify, claiming they are able to be cheaper because they don’t need to subsidise a free ad-supported service. Mog’s US service launched in December and costs $5 per month, which compares with Spotify’s £9.99 a month in the UK.

To get theoretical for a second – the validity of Mog’s claim that it can undercut Spotify because it doesn’t have to subsidise an ad-supported service depends on the relative cost of customer acquisition for the two businesses. The beauty of free services is that they spread like wild fire by word of mouth and customer acquisition to the paid service can be low, depending on conversion rates – this is the basic logic behind the freemium business model. In the case of Spotify the main cost of acquiring paying subscribers is subsidising the free service, and that cost will swing hugely with the rate of conversion (if the conversion rate doubles from say 3% to 6% then the cost halves) – and it is this which will tell in the end. Mog will have more straightforward customer acquisition expenses and their efficiency in PR, buying media and converting site visitors to subscribers will be the difference between success and failure (assuming they have a decent service).

To wrap up, I think we are headed for a period where the music industry will experiment with subscription services and free services will become more limited. It is rumoured that Spotify’s launch in the US will be subscription only, for example. This structure has the advantage for existing industry players that it protects the existing industry structure. Whether it will be successful in getting more money into the hands of artists and reducing piracy only time will tell. Right now my personal view is that it is to tough to call – certainly existing music subscription services like Rhapsody haven’t made much headway, but I think these new services offer a better user experience. Maybe it will come down to price in the end – at $5 per month Mog is already heading towards the point where many will just sign up without thinking too much about it.